Sunday, March 25, 2012

Do We Have Free Market Capitalism? Part I: Money

Over the past decades, the United States has experienced an increase in the disparity between the rich and the poor. And most recently, millions of Americans have seen their jobs as well as their wealth (for most Americans that is the value of their homes and retirement accounts) shrink. It is only natural, in this time of uncertainty, to conclude that free market capitalism has failed and that there needs to be more regulation and government intervention. One would have to be both delusional and lacking in compassion to conclude that the current system works.

However, the popular diagnosis and recommended treatments for our current
ailments are misguided and will only result in a exacerbating our problems.
The essential problem is that when most people say “free market capitalism,” they are not referring to a defined economic system. Rather, what they really mean is the system we have now. This system, as the occupiers have Wall Street have rightly noted, is broken and unfairly favors corporation. On that point, I could not agree more. Indeed, the system we have now privileges the rich. However, the system we have now cannot rightfully be called “free market capitalism.”

Just as a physician cannot treat a disease without first understanding the proper constitution of the human body as well as the malignancy that plagues it, neither we will beable to treat our economic ailments, if we remain ignorant of the diseased economic system that we now live under.

A market system requires a great many components such as, a means of exchange, a system of lending and borrowing, an organizing framework for entrepreneurial endeavors, etc. Of course, this is not an exhaustive listing by any means, but these are important components and it is crucial that we analyze them to determine whether we are indeed living under free market capitalism. For the next coupleweeks, I would like to look at the various components our current system and
discuss why it cannot rightfully be called “free market capitalism.”

By means of exchange, I simply mean some widely-accepted, durable, intrinsically-valuable commodity through which we exchange goods and services as well as set prices—in other words money. Without it, we would bartering, which is highly unproductive and therefore, impoverishing. Since money is like the blood of our economic system, it is important to ask whether this essential component operates within a free market framework. Is our money produced by the free market? Absolutely not!

Our currency, the dollar, in fact most of the state-produced means of exchanged imposed by governments, do not meet this criteria. There is nothing intrinsically valuable about colored paper with president faces on them. They might make fine collector’s item, but even that is suspect since paper money is not durable.

Paper money arose initially as bank notes, which people used because it was too cumbersome to carry the gold in the bank, which the note represented. But the money was not the bank note but the gold. With the Civil War and the need for the governments to raise money, both the North and the South imposed paper money on the U.S. Population. And under Richard Nixon, the government decided that the United States currency would no longer be redeemable for gold. In other words there is no valuable asset that backs Federal Reserve notes in your wallet. Its value is
only sustained by the illusory esteem it has received in the global market. As non-Americans become aware of the decrepit foundation of the United States economy, the paper is your wallet will become increasingly worthless.

But of course, governments always prefer money that they can print and inflate because this gives them enormous power, a power they often use to enrich their well-connected friends at the expense of the general population. But a free market system would have never produced this because consumers (you and me) would not naturally ascribe value to pieces of paper. We only use Federal Reserve notes because the government compels us to.

In addition, the government forbids the existence of competing currencies. Recently, Bernard Von NotHaus tried to provide an alternative to government fiat currency and now, he is serving ten years in jail for counterfeiting This is a crucial thing to understand. When the government bureaucrats print money and thereby create impoverishing inflation, they euphemistically call this “quantitative easing.” But when a private citizen tries to provide consumers an alternative (an alternative that they are free to accept or reject) to the ever-depreciating fiat currency imposed on the free market, he is arrested for counterfeiting.

An essential component of a free market is the free part. If competitors are barred from entry through the institutionalized coercion that is intrinsic to the state, then the market cannot be said to be “free.” For a market to be deemed “free,” there must be competition. There must a mechanism through which consumers can chose between multiple commodities. A natural
currency or currencies would emerge in a free market, as it always does whenever human beings interact on a large scale, because exchange is necessary to our very survival.

It’s quite simple. If you had to produce everything you need to survive, you would probably die or at the very least your life would indeed to a Hobbesian nightmare—short, nasty and brutish. If you produce clerical services and you want to purchase a cell phone, without money, you would have to find a cell phone producer in need of your clerical services. This would be highly inefficient. It might take yearsand many travels to find such a perfect coincidence of needs. That situation multiplied planet of 7 billion people would most certainly result in mass starvation. Thus, while the love of money is indeed the root of all evil, money itself is a necessary component in creating an economic system that provides food, shelter and even entertainment for our amply populated planet.

Yet, as we have seen money is neither produced nor regulated by free market capitalism. It is controlled by a government monopoly that prints intrinsically worthless paper at will and bars competitors from offering an alternative means of exchange. Given the fact that this most critical element of the system is not under the governance of the free market, it is wholly inaccurate to call our current system a free market. Moreover, if the monetary system is not the product of free market capitalism, is it not at least possible that the fiscal maladies we are facing,principally, rising inflation, which most egregiously affects the poor, is not caused by free market capitalism but by the monopoly that governs that monetary system—the state?